Types of agribusinesses Chapter 6

Objectives: Compare proprietorships, partnerships, and corporations. Explain the characteristics of the single (sole) proprietorship Explain the characteristics of partnerships. Discuss the different types of corporations. Explain the characteristics of limited liability companies. Explain the characteristics and value of cooperatives. Describe the characteristics of franchises

Agribusinesses 3 major types of business organizations: Single (sole) proprietorship Partnership Corporation 3 types of corporations: Subchapter C regular corporations Subchapter S family farms and small businesses Subchapter T cooperatives

Business Organizations~ Sole proprietorship organization that is owned by one person most common form of business ownership 19.7 million in US Partnership two or more people make a legal agreement to become co-owners of business 2.5 million in US Corporation a legal entity with authority to act that has liability separate from that of its owners 2.8 million in US 87% of all sales volume

Sole Proprietorship~ Major type of legal structure in the agricultural industry Simplest type of business Easiest to organize Closest to the American dream Owner is in complete control Figure 6-2

Advantages of Sole Proprietorship~ Simple to start Few government regulations or restrictions Only requirement is a license Management and control are solely in the owner’s hands No voting is necessary

Disadvantages of Sole Proprietorship~ Unlimited liability Claim that creditors can make on the owner’s personal assets for payment of business debts Can be difficult to accumulate the large amounts of capital required to begin and operate a successful business

Types of Partnerships~ General partnership: Formalized agreement between 2 people specifying: Resources contributed by each partner Who has decision-making authority How profits will be divided Limited partnership: Partners not completely liable for each others’ debt Person invests in partnership Does not participate in daily business management Limited liability partnership: Partners can protect their existing personal assets Partners not responsible for the business’s debts beyond the amount of their investment

Written Partnership Agreements~ Wise for each partner to get the advice of a lawyer Prepare yourself before calling the lawyer because of the expense Be sure that your partnership agreement is put in writing Model Business Corporation Act Page 128

Corporations~ General Motors, Ford, IBM, FedEx, Exxon, and John Deere Small businesses may incorporate as well Characteristics: legal entity separate from the people who own it can own property, pay taxes, make contracts, sue, etc. issue stock new owners called stockholders pay a set price for their shares gets one vote for each share purchased

Types of Corporations~ Subchapter C sells stock to investors profit-making Board of directors may pay dividends to stockholders Subchapter S primarily for small businesses taxed like sole proprietorship certain qualification requirements Subchapter T very popular in ag industry non-profit figure 6-5

Establishing a Corporation~ Articles of incorporation filed with the secretary of state’s office and include: The name of the corporation The names of the people who incorporated it The purposes of the corporation The duration of the corporation The number of shares that can be issued The voting rights attached to each type of stock Other rights of the shareholders The minimum capital of the corporation The address of the corporate office The name and address of the person responsible for legal service The names and addresses of the first directors

Bylaws~ Corporations have bylaws in addition to articles of incorporation Describe how the firm is to be operated, from both legal and managerial points of view, and include: How, when, and where shareholders’ and directors’ meetings are held how long directors are to serve Specifics as to each director’s authority The duties and responsibilities of officers and the length of their service How stock is issued Other matters, including employment contracts Figure 6-6

Limited Liability Companies (LLC)~ Legal entity that exists separate from it owners Combines the corporate advantage of limited liability with the partnership advantage of single taxation Advantages of LLC: liability of member is limited members are not liable for debts of the LLC unless they have given personal guarantees for those debts Disadvantages of LLC: work and expense involved in initial formation post formation record-keeping requirements Laws regarding LLCs are still developing

Cooperatives~ Corporation formed to provide goods and services to members either at cost or as near to cost as possible Not formed to make profits Serve the people who own shares in the organization Agribusiness cooperatives are very popular 3 cooperative types: Supply Marketing Service

Difference between Cooperatives: Supply Cooperatives: Buy supplies in quantity for resale to members Members save money because items are bought in bulk Can manufacture items rather than buying them to sell Marketing Cooperatives: find buyers who will pay the highest price for ag. products Service Cooperatives: provide members with specific service rather than a product members probably could not afford services individually

Statistics on Cooperatives~ More than 21,000 cooperatives nationwide Both business and individual members Agricultural cooperatives are a multi-billion-dollar industry Prime Example: Farmland Industries, Inc largest agricultural cooperative in 1999 annual revenues of $4.5 billion 1,800 member cooperatives 250,000 farmers in 19 states

Cooperatives and Membership~ Some co-ops serve the general public Others serve members only Major emphasis always on members Voting stock and investment stock are separate Only common (voting) stock gives a person the right to vote on business matters Preferred (investment) stock only gives a person the opportunity to invest in the business and receive a reasonable return on investment

Cooperatives and Control~ Most cooperatives use a democratic system of control each member has one vote only no additional votes for owning extra stock Critics often contend that co-ops are run by a few “elite” members only because many members fail to exercise their right to vote during the annual stock-holders’ meetings

More About Co-ops~ 3 distinguishing characteristics: Service at cost any excess earnings are returned to patrons in the form of patronage dividends Democratic control one member, one vote Limited returns on investment Figure 6-7, Advantages and Disadvantages

Franchises~ Contract in which a franchisor sells to another business the right to use its name and sell its products Franchisee (person purchasing the franchise) buys a system of operation that has proven successful McDonald’s, Wendy’s, and Domino’s 600,000 franchised outlets in the United States McDonald’s has more than 30,000 restaurants in 100 different countries Franchising sales accounted for nearly 33% of all retail sales in the US in 2004 Figure 6-8, Advantages and Disadvantages

What Do YOU think? Consider the pros and cons of each type of agribusiness. Which style is best suited for you as an entrepreneur?